This Dividend Aristocrat Is Our Top Pick for 2020

Our top dividend stock for 2020 is pharmaceutical manufacturer AbbVie Inc. , a health care giant with a rare combination of qualities. As a stock, AbbVie provides a mix of growth, value, and income that few companies in our research database can match. With a high dividend yield of 5.3%, and a compelling future growth catalyst in the form of a major acquisition, AbbVie is likely to provide shareholders with an excellent return in 2020 and beyond. In addition, the company is among the Dividend Aristocrats, a group of 57 stocks in the S&P 500 with at least 25 consecutive years of dividend increases. We believe investors looking for high-quality dividend growth stocks should focus on this list. As a whole, the Dividend Aristocrats have outperformed the broader market over the past decade, and did so with a lower level of volatility. In addition, the Dividend Aristocrats provide above-average dividend yields, along with annual dividend increases to provide shareholders with reliable income growth. Humira Uncertainty Is What Ailed AbbVie in 2019 AbbVie shareholders are entirely happy to see 2019 end. The stock price has declined 3% year-to-date. Fortunately, dividend payments to shareholders have resulted in a positive year-to-date total return of 3%. Still, AbbVie deeply underperformed the S&P 500 in 2019. The broader index delivered a total return of 32% as of this article. The main reason for AbbVie's underwhelming performance this year was the uncertainty regarding the fate of Humira, the top-selling drug in the world. AbbVie has recorded massive growth for this multi-purpose drug in recent years, which has fueled the company's impressive top-line expansion. But there is now a sense of great concern among investors, as Humira lost patent expiration in Europe. As a result, international sales of Humira declined 29% over the first three quarters of 2019, as AbbVie was forced to cut prices to remain competitive with new generics hitting the market. These fears are exacerbated by the fact that AbbVie will lose patent exclusivity for Humira in the U.S., starting in 2023. Since Humira represented more than half of AbbVie's total revenue over the course of 2019, patent risk remains a lingering concern. However, AbbVie has continued to generate impressive growth throughout the year, even with the international pressure on Humira sales. For example, U.S. sales of Humira rose 8% through the first three quarters. While biosimilar competition is sure to put a dent in domestic Humira performance in 2023, AbbVie has also registered growth from its portfolio of new products. A Health Pipeline AbbVie invested over $5 billion in research and development in 2017 and 2018 to build a portfolio of next-generation products, which are now starting to deliver meaningful growth for the company. To that end, revenue from Imbruvica rose by 30% through the first three quarters of the year. Venclexta sales more than doubled in the first nine months. These products fueled 38% growth for AbbVie's hematologic oncology portfolio over the first three quarters. Overall, AbbVie has continued to perform well fundamentally, even with the pressure facing Humira in the international markets. Adjusted earnings per share increased 12% through the first three quarters. There is a strong possibility that the company can continue to increase earnings in 2020 and beyond, even as Humira is set to lose patent exclusivity in the U.S. in 2023. Strong Growth in 2020 and Beyond This new year should bring continued growth for AbbVie, thanks to its organic investments in building its pipeline, as well as the massive $63 billion acquisition of Allergan . Allergan is a pharmaceutical giant of its own, focused on four key therapeutic areas including medical aesthetics, eye care, the central nervous system, and gastroenterology. Botox is Allergan's crown jewel, generating $3.6 billion in sales last year. This acquisition is truly transformational for AbbVie, as it greatly diversifies its product portfolio by giving it much greater exposure to cosmetic pharmaceuticals. According to AbbVie, the combined entity will generate annual revenue of nearly $50 billion. AbbVie expects the acquisition to boost adjusted earnings-per-share by 10% in the first year upon closing. AbbVie took on a sizable amount of debt to finance the acquisition, but the company is committed to paying down debt and retaining an investment-grade credit rating. AbbVie targets debt reduction of $15 billion to $18 billion by 2021. We expect AbbVie to continue generating earnings growth over the next several years, even with the significant challenge of Humira patent expiration. There are many reasons for this - first, AbbVie's new, improved drugs that target the same indications as Humira, have a good chance at capturing much of Humira's revenue stream over the coming years. As a result, AbbVie management believes that revenue in 2025 will be higher than in 2018, despite that Humira's revenues will be close to zero in the mid-2020s. This is even before the impact of the Allergan deal, which AbbVie seeks to close over the next couple of quarters. Value, Dividends, and Growth Lead to High Expected Returns AbbVie stock is highly attractive, as it combines value, dividends, and growth all in one stock. Shares trade for a price-to-earnings ratio of just 10, based on expected EPS of $8.91 for 2019. This is a very low valuation multiple -- well below AbbVie's peers, and is a clear indication of pessimistic investor sentiment. But we believe the valuation multiple has room for significant expansion, as AbbVie proves it still has positive growth potential. Separately, AbbVie's earnings-per-share growth will boost shareholder returns. The company can generate positive earnings growth in the coming years through revenue growth (through its own pipeline as well as the Allergan acquisition), share repurchases, and merger-related cost synergies. Lastly, AbbVie's dividend will add meaningfully to shareholder returns. Thanks to the company's strong cash flow, it increased its most recent quarterly dividend by 10%. The forward annualized payout of $4.72 per share represents a dividend yield of 5.3%. This is a highly attractive dividend yield, while leaving room for future dividend growth as the payout ratio stands at a very modest 53%. AbbVie has multiple catalysts for future growth, both in terms of its organic pipeline and the massive acquisition of Allergan. In the meantime, the stock is cheap, and offers a high dividend yield above 5%. Put together, these qualities make AbbVie our top Dividend Aristocrat to buy in 2020. (ABBV is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells it? Learn more now.)

This Dividend Aristocrat Is Our Top Pick for 2020

As it smooths out the wrinkles from 2019, this pharmaceutical manufacturer should have a healthy year.

Columnist Conversation

An interesting chart

This Weekend on Real Money

Stocks Under $10 Portfolio

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.